There are several benefits that a business can gain by being able to release cash from assets that were not previously available. However, there are also some drawbacks that a company has to face when they select the option of invoice discounting over a traditional funding source like loan or bank overdraft. The advantages and disadvantages of invoice discounting are discussed below. For more information on invoice financing, we’ve put together a comprehensive guide on invoice finance, the different types, and when it may be useful for a company to use invoice finance facilities: https://www.tradefinanceglobal.com/invoice-finance/
In order to obtain finance through invoice discounting you do not always need to have assets for security; unlike the requirements of other financial products. This is a great advantage, as many standard bank loans are not offered without robust security packages and business owners typically have charged assets or few assets to offer as security.
There is sometimes an option in relation to invoice discounting where the customers of a business do not know about the funding as a confidential financing technique is used. This is unlike loans and several other methods of lending. In the event that confidential invoice discounting is used, the company will collect all the payments from their customers and not change the way their employees are processing payments.
As the receivable or invoice is being used as security and there is cash being advanced against it, it is sometimes possible to receive more capital than one can obtain from an overdraft or a simple loan. However, the cash advanced will relate to the sales ledger of the company. There are numerous bolt-ons that are available in relation to a facility and each must be chosen according to the needs of a business. A number of these additions are meant to reduce risk and time spent in relation to debtors and include back-end payroll systems, protection from bad debts, specific advice and specific services for other industries.
There are also a number of disadvantages of invoice finance – some are set out below.
The requirements for this form of financing are unlike others and it need to be handled with care, so that undesired situations do not arise.
There are numerous lenders offering invoice financing, however most financiers will usually require only commercial invoices where other companies are the end debtors. Money owed by the general public cannot be recovered or used when dealing with this form of financing.
It may be a stipulation that companies can only receive financing if they have a well-developed in-house credit collection system, and the lender may need to approve their processes.